Thanks to ZeroHegde. 

Below are some of the key points contained in Stree Test Methodology:

(1) “more than 150 senior supervisors, on-site examiners, analysts and economists” spent a month reviewing the 19 BHC’s that hold two thirds of the country’s bank assets and account for one half of the loans

Ten trillion dollars in assets and five hundred trillion dollars in derivatives in one month? A typical single bank examination utilizes hundreds of examiners and takes several months. 

(2) ”the firms were asked to project…..the firms were asked to provide…etc.”

In other words, the banks tested themselves and the 150 examiners took their word for it. Any wonder they passed?

And my fave:

(12) “Supervisors evaluated firm loss estimates using a Monte Carlo simulation that projected a distribution of losses by examining potential dispersion around central probabilities of default.”

Ah…smells like Gaussian distributions. The old standard. We have seen how well that assumption works in these unusual times. An example of the dependability of using Gauss, taken from stock market movements in October, and calculated by Nassim Nicholas Taleb of Black Swan fame, showed that the price movements seen in October 2008 could be expected to occur---using estimates based on Gaussian distributions---once every 73,000,000,000,000,000,000,000 years. For those of you not tied to Biblical strict constructionism, the Universe is around 18,500,000,000 years old. Looks like it will be a few quintillion years before we see October again.

Thanks to ZeroHegde.

Fuck this,.. Leaked stress test results!!

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent. (Based upon the “alternative more adverse” scenario which had a 3.3 percent contraction of the U.S. Economy in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth of the U.S. Economy but a 10.3 percent jobless in 2010.)

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans. (Without further government injections of cash)

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital! (HSBC is NOT in the top 19 banks undergoing a stress test, but is mentioned in the report as an aside because of its risk capital exposure to derivatives)

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

More at: http://turnerradionetwork.blogspot.com/2009/04/leaked-bank-stress-test-reults.html

Back after a long break.. Again, muddled between a ecstasic phase and a job dilemma. No regrets what so ever.. 

I am surprised the market has been holding over the last couple of weeks. The market continues to rally on a sign of good news, and ceases to respond on bad news. This is not a actual sign of a market bottom, but the investor frustration on the pace of the drop. I do believe that the market has further downside beofre a sustainable recovery. 

Fed's beige book is out today, and on the face of it, it signalled a near end to the recession, and led to a last hour market rally, Rake the top and there still are some bad news across US. "A complete absence if lenders in commercial real estate market", "steady or falling prices since last report", "revenues at services firms generally decreased, as did average service sector wages and employment".. and worse, "the deflation is still a looming danger". 

Quote of the day "If you owe yoru bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy". In regard to the position of US with China!! :) 

Todays market action has been volatile, with a wild see-saw action, as both positve and negative economic data flooded the market. 

The market saw some initial buying interest on a positve report from the commerce dpt that durable good orders unexpectedly showed a substantial increase in the month of February after falling in each of the six previous months. The report showed that durable goods orders jumped 3.4 percent in February after falling by a revised 7.3 percent (from 4.5%) in January. Economists had been expecting durable goods orders to fall by 2.5 percent. Durable good orders is a leading indicator, and it bodes well for the industrial machinary stocks. Some of the stocks that I like in this segment - GE, PRST (though a much grim printing machinary stock), DXPE. 

The markets saw some further upside as a saperate report showed an unexpected increase in new home sales in the month of February. This marked the latest in recent string of positive housing market data. Though the SALES are on the rise, the median price of the homes has not stopped its decline. With high inventory levels and rising unemplyment it is a hard case to make for a housing market stabilization. 

Midday of the session, when DOW was up about 200 points, investors were spooked by the 34 bn 5yr treasury bond auction results. The auction drew a yield of 1.849 percent and a bid-to-cover ratio of 2.02, well below the average of 2.21. (bid-to-cover ratio is an indicator of demand for the treasuries). The failed auction of UK gilt added to the negative sentiment. I am not sure how much to read into the data, as it seems, it is a holiday for Japanese bond markets and Japan is one of the big buyers of US treasuries. 

The new mantra that is driving the markets over this week is the optimism on PPIP. Economists and investors argue on both sides of the arugument whether PPIP will be the savior. Bill Gross of PIMCO endorsed it. Fink of Blackrock,  and the eternal bear Nouriel Roubini expressed an positive opinion. I personally do not think it will work. Zero Hedge has a very interesting table from Goldman Sachs.. It shows Goldman's estimates for how banks are carrying assets like commercial mortgages and consumer loans on their books. The banks, it seems, are carrying those assets at ludicrously optimistic averages of between 89 per cent and 96 per cent of their original purchase price. For the PPIP to be benificial to the banks (which I opine is the main  intention behind the plan), the bids should be north of 90 cents on a dollar, when the market price for the same is speculated to be below 50 cents on a dollar. However, I was wrong many times and so was GoldmanSachs. 

The most repated sentence on CNBS these days -" March 8th bottom is going to hold"!! and that is exactly what they said from Nov through feb.. " Nov 20th bottom is going to hold". As Jon Stewart said - "FUCK YOU"!!! 

Song: "Last kiss" - Pearl Jam

Mood:  "I wish I were right" 

Don't stop dancing!! :)

Somethings, no matter how many times you repeat/undergo, would not give you enough practice to deal with it the next time. No wonder, I lived my whole life in one dilemma or the other!! 

Song: "Dont stop dancing" -Creed

Mood: Philosophical 

PPIP and the 500 point rally..

Today Tim has unveiled his long-awaited (much in the lines of Paulson Plan) to remove bad assets from the books of the banks. This PPIP is intended to take the legacy assets off the balance sheets of the banks, and there by help the banks raise their capital levels and start lending. This program ensures that the private sector is particpated in the buying along side the public sector (backed by and over looked  by FDIC, Treasury and the Fed). This 'program' is supposed to generate a buying power of about 500Bn, with a potential to expand to about 1T. The program will allow banks to identify which assets they wish to sell, FDIC will do an analysis, leverage will not exceed 6 to 1 in debt to equity ratio, and it will include eligibility for all sizes of institutions.  Pools will then be sold to the highest bidder and financing is provided via an FDIC guarantee.  Then the private sector partners will control and manage the assets until final liquidation. 

On teh face of it,  this might seem to be a real good deal for the banks( it might as well be), but I have my doubts. Well, I base my argument based on te response to last week's TALF program. Of the 200Bn plan that was announced, the bids recieved were only of 4.7Bn. Also, the crux of this PPIP  is to set the price for the assets, which is THE million dollar question. If I am an investor planning to but the assets from the banks under PPIP, I would try to pay as less as possible (though FED will lend me money to lever  up my investment 6 to 1, my 16% investment is in the first lein of losses), and that woudl force the banks to write down the remainig assets to the new price, (assuming banks are very much carrying the assets at above market prices) - and more write downs lead to more losses, and more troubles for banks. Say, if I am FORCED to buy the assets at a price above the market price, well, the banks benifit. And, I and the tax payer will benifit as long as my return is more than the cost I paid (maane, the loans turn out to be good loans and paid up in time). But in this environment, I guess it is a hard bet to make. However, What I think as the actual intention of the FED is to CREATE a market for the assets, and FORCE the banks ( as Private Investors) to bid for the assets (of other banks) at a price above the mark, and eventually drag the value of all the assets along. If what I speculate is right, well, I am screwed, as I am short the market. And C and BAC will make an amazing investment decisions even at these prices.  

Oil, after a long time has hovered around $53 dollars. I agree with Pickens in his call that Oil would reach $60 and be at $70 by this year end. Well, it is not that the demand for oil is going to ramp up, but that the pace with which the rig count is droppping is far more worse than the demand itself. U.S. Rig Count down 41 from last week at 1,085; down 699 year over year. Canadian Rig Count down 61 from last week at 159; down 169 year over year. The US Offshore rig count is 43, down 4 from last week; down 14 year over year. If this trend continues, I guess, OPEC would not even have to think about cutting the production to jack up the prices.. Btw, I own commodity etf, in this environment where Dollar devaluation seems inevitable, it is better to invest in 'inflation' trades.

Song: "Everybody's changing" - Keane (This band is known as "the band with no guitars", coz of its heavily piano-based music)

Mood: "Why do I push the things till the last minute"

IBM is in discussion with Sun (JAVA) about a potentail acquisition in a 7Bn deal. This would mean a near 100% premium to Sun's ydays close. I personally think this is not going to bode well for IBM or for the combined compnay. This deal came through on the heels of the announcement made by CSCO the other day about their entry into the server market. Currently the server market is dominated by IBM, and HP. CSCO's (a supplier of blades, swiches to IBM and HP servers) entry into the server market would pose a threat to the market share on IBM. Lets hopw its not another S-Nextel, or Alcatel-lucent deal. 

Unemployment in the UK crossed the 2 million mark and the unemployment rate hit 6.5%, its highest rate in more than 11 years. The number of people claiming unemployment benefit rose by 138,400 to 1.39 million. This was the largest monthly increase since records began in 1971.

http://www.ritholtz.com/blog/wp-content/uploads/2009/03/45279strip.gif

The FOMC has come in with no rate change as we had expected.  When it is already at a near-zero rate policy, there was no other outcome.  The Fed Funds Target Rate was left at 0.00% to 0.25%, and the discount rate was left at 0.50%. The Fed will buy an additional $750 billion worth of agency mortgage backed securities.  It will also purchase an additional $100 billion in agency debt instruments, and it will purchase an additional $300 billion worth of long-term Treasury securities over next 6-months. The magnitude here is that the mortgage backed security purchases are now more than doubled, and the unconventioanl purchase of Treasuries, which would force the mortgage rates lower. Hopefully, this would stop the ever receding housing market. Treasury yields in 10-year and 3-year notes have tanked as bond prices have gone up.  The dollar has also tanked, and gold is up higher as a result. I guess the follwing days trades would be 'inflation' centered. Gold would continue to go up, may touch the 1000 levels again.. TBT and PST would be good buys too.. no downside by quite an upside. 

Tomorrow's trade - BUY BUY BUY, commodities, gold, stocks, bonds. .. SELL SELL SELL Dollar, 

Bear market Rally - Part II

Happy death Anniversary, Bear Stearns! 

A not-so-surprising rally over the last week, S&P up about 12% and everyone on CNBC crappping about equity markets bottoming. The bullish case is pretty easy to make. Commodity prices picking up, lower credit spreads, Fed and Treasury funded programs, banks returning to profitability ( for the first two months), global stimulus packages, TALF & TARP policy initiatives .. Yet, it is not all good as it sounds. 

FUnadentals are still bad, job losses have not yet subsided, House prices have not stabilized yet, consumer confidence still low, bad balance sheets at banks, banks not issuing credit, Manufacturing and productivity at an all time low .. 

Well, my take,, it is easy to get carried away by the bull market action, but the fact is there is a thin line between a bounce and a recovery. Typical bear market is interlaced with 2-3 bear market rallies, and the typical upside in a bear market rally is about 20%.. ( well, i agree, stats lose their relevance in a recession, but no wrong in finding a reason in numbers). And this rally, though is strong ( 4 consecutive up-days), does not have enough fundmental support to morph into a next BULL MARKET. 20% upside from the bottom of S&P would give a close of 811. I would not as much surprised if S&P breaches 800 level, and Dow 8000. Enjoy while it lasts. BTW, I am short the market.. and I kick mymself hard for selling my stake in GE and C minutes before Friday close. 

On sunday, OPEC decided not to cut production. It indeed is surprising when it seemed that the primary goal of the cratel was to puch the price target to abouve $75. Not that the cartel became philanthropic overnight, it is that the world economy is in such a fragile state that any increase in the oil price would do more harm to them and the world than good. 

The American International Group on Sunday released the names of financial institutions that benefited last fall when the Federal Reserve saved it from collapse with an $85 billion rescue loan and then three subsequent bailouts.

$38.8B US Banks

$50.2B Foreign Banks

$12.0B Municipal Bonds

$84.0B Unaccounted for.. (may be bonuses to those very assholes who are responsible for the badbets!!).. And then the bullish guys owe the 'anticipated-bull-market' to the initiatives from Fed and Treasury.. 

AA is the latest addition to the comapnies that cut the dividend. In a measure to cut costs, AA today reduced its dividend to 3 cents to 17 cents per q. This would save about $400 Mn per year. What is surprising is that AA is issuing common stock and preferred at these levels. The problem with Aluminium is that the prices have been down very very sharply, and accoring to the management of AA,  they are expected to drop by another 25% in the first Q. When the prices were on the rise, Chinese factories have incresed their Al production, and now the collective Chinese production is three times that of US. And a big dent in the consumer spending, and Capital expenditure spending continue to hurt every Al producer. Is it a BUY at these levels. May be yes, May be No, or May be I dont know. The post market action ( down 20%) was more of the fear of dilution. If the Al producers start cutting the production to stabilize the prices any near term, owing Call options (2010 exp) is not a bad idea.

Mac and iPod sales continue to be lousy in Feb...

The latest National Association of Home Builders’ survey shows that confidence is unchanged from last month.  This is the second month in a row that the level has remained at 9 for new single-family homes. THis might be percieved as a half-empty-glass case. The number has been at such a low level (50 is the pivot point.. above 50 - expansion and below 50 - comtraction) that it cannot get any worse than this. 

Today, me Harish invited Ranga and Sharmila over for dinner.. and it was amazingly fun.. Three hours of continuos laughter. :) :) .. 

Song: Tainted Love - Marlyn Manson. 

Mood: "Excited" 

A rally long pending..

A rally that was long pending. A positive news from Citi initiated the uptrend even before the market opened. In a internal memo, Vikram Pandit said that the company is profitable through the first two months of 2009 and is having its best quarter-to-date performance since the third quarter of 2007. That initiated the rally, and it did rally strong for the day. Midday, Ben's comments about the economic recovery IF the banks are stabilized added to the optimism of the investors.  

That raises the question about the credibility in Pandit's statement. Well, Citi might be well capitalized and be profitable for the first two months of the Q, but it does not guarantee a equally good last month of the quarter.  Fitch's Prime Credit Card Delinquency Index measures credit card debt more than 60 days late through January, and it surged to a record 4.04% in the most recent month, trumping the 3.75% record set in the previous month. This might as well weigh on the credit card losses of Citi. My take, Citi over the next 2-3 days (this week has no major economic data releases, though US trade data is slated for release on Friday), would trade at the same levels ... but as the earnings date near (in APr) it would fall back to dollar menu.. :) 

Well, as I write this,trade data from China is out, and well, not a good news. The trade gap narrowed to $4.8 billion, about an eighth of the amount (Not a typo,, it is one eighth) in the previous month. Exports tumbled 25.7 percent from a year earlier. Imports fell 24.1 percent. The median estimates in a Bloomberg News survey of 16 economists were for a $28.3 billion trade surplus, a 1 percent decline in exports and a 22.5 percent drop in imports.  The corresponding eport drop in Jan was 17.5% and the imports fell  by 43%. There is not hope that the exports figure would improve any time soon. And the imports are very much dependent upon the success of the stimulus plan. The fact that about one third of the goods manufactured in China are exported, and these siginificant drop in exports signals the extent of decline in global economies. 

On the economic front, Jan wholesale trade data came in lower, though not enought to meet with the forecast.  January's inventory levels fell 0.7%, versus the consensus outlook for a fall of 1.0% (which is bad). Even worse if the difference between the sales drop and the inventories drop. Sales dropped 2.9% from December levels, and nose-dived by 15.4% from the prior year period. The sales-to-inventory ratio expanded to 1.3. 

http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sbak1hSSdAI/AAAAAAAABks/pUTcIn8H9Do/s1600-h/sales_inventories_chart.PNG

http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sbak1hSSdAI/AAAAAAAABks/pUTcIn8H9Do/s1600-h/sales_inventories_chart.PNG

High-tech manufacturing company United Technologies Corp. said Tuesday it will issue 11,600 layoffs this year due to the deteriorating global economic outlook. A ray of hope that AT&T Inc. plans to invest up to $18 billion and create 3,000 jobs nationwide this year, to keep pace with demand for wireless, broadband and video services.

An interesting article on Semantic Search. A technology that might provide an alternative to Google.. http://www.informationweek.com/news/internet/search/showArticle.jhtml?articleID=215801388&subSection=News

Quote of the day:  If the banks become stable, the economy may turn. - Ben Bernanke. 

Yes,, infact a BIG IF!!! :) 

Song: Mother - Pink Floyd (They were playing this song on the radio today monring on my way to office :) :) ) 

Mood: "If I keep my eyes closed, would the crap around me disappear!"

Lazy..

Could not figure out whether I am too lazy or too tired to write. !! 

Song: Hurt - NIN 

Mood: "Waiting"